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Many investment savvy individuals and couples are looking overseas for rental income properties, vacation homes, and even retirement homes. The tax benefits of owning both residential and rental property overseas are similar to the benefits of owning a home in the United States, with a few exceptions.

Continue reading to understand how tax law in the US handles citizens owning foreign property.

Foreign Residential Property for Personal Use

If your foreign property is used as a second home, you may deduct the mortgage interest just like you would if it were a second residential home in the states. You can deduct 100% of the mortgage interest on your overseas second home for up to $1.1 million of secured debt. The debt should be secured by the combined value of your first two homes. You can also deduct the foreign property taxes on your overseas home, as well as any other properties you own. Of course, you will also need to pay property taxes overseas. This can often be done online, for example, you can make property tax online payments in Belize.

Just like your primary US residence, you can’t deduct expenses such as maintenance, utilities, or insurance unless you claim it as a home-office deduction.

Foreign Rental Properties

Tax rules become more complicated if they make rental income on overseas property. Different tax rules apply, depending on the number of days each year the house is used for personal use rather than as a rental. Your foreign rental property will fall into three categories:

  • The house is rented for 14 days or less: You can rent the house out for up to 14 days each year and not report the income to the IRS. You can even rent it for $10,000 a day, and not report that rental income if it wasn’t for more than two weeks. The home is officially considered your personal residence, which allows you to deduct property taxes and mortgage interest under the usual second-home rules.
  • The house is used personally for more than two weeks or 10% of the total number of days it was rented: Your foreign property is considered by the IRS as a personal home, and the tax rules for a personal home apply. You can deduct property taxes and mortgage interest, but you can’t deduct any rental expenses. Likewise, if someone in your family uses the home this counts as personal use unless they pay you to rent at a fair price.
  • The house is rented for 15 or more days. Likewise, you use it for less than two weeks or 10% of the number of days the house was rented out: The IRS considers this a rental property; rentals are considered a business. In this case, you need to report the income to the IRS. However, you can also deduct certain rental expenses, like property taxes, mortgage interest, advertising expenses, utilities, insurance, and the cost of property management. One big difference for a rental property abroad is overseas property is depreciated over a 40-year period, rather than the 27.5 years for U.S. residential property. However, whether the home is on U.S. soil or abroad, you can only depreciate the building’s value. You cannot depreciate not the value of the land.

Anica Oaks is a professional content and copywriter who graduated from the University of San Francisco. She loves dogs, the ocean, and anything outdoor-related. You can connect with Anica on Twitter @AnicaOaks.

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Posted in: Taxes